Sovereign risk is one of those terms that is often bandied around in the back of prospectuses, often associated with companies with projects in developing countries. Sovereign risk refers to the uncertainty faced by investors due to government actions or policies that can adversely affect their investments.
There are numerous examples globally where governments have changed (or been overthrown), resulting in policy changes (official or unofficial) that change the investment landscape.
In Australia, sovereign risk has been used by mining lobbyists in marketing efforts to pre-emptively counter changes to policy positions. Think back to the Federal Labor Government’s Mining Tax or the WA State Government’s floated idea to change gold royalty rates nearly a decade ago. Both were wildly claimed as being the start of the death of the resources sector due to increased sovereign risk.
A decision by the Australian Government recently on Regis Resources’ McPhillamys Gold Project in New South Wales has once again raised the spectre of sovereign risk, however this time, the claims might just be true.
This month, Federal Environment Minister Tanya Plibersek effectively halted the billion-dollar McPhillamys Gold Project in New South Wales. Ms Plibersek overruled a decade of approvals at the State and Federal level to stop a planned tailings dam for the project, a key piece of infrastructure required for development. Ms Plibersek backed the submission of an indigenous elder over the impact on traditional songlines, seemingly ignoring the local indigenous land council that supported the project.
The decision blindsided Regis Resources (ASX:RRL), the project’s owner, which had meticulously secured approvals over years of effort. The project promised economic development, jobs, and significant gold reserves.
Despite Ms Plibersek claiming that the refusal of the tailings dam didn’t stop the project from being developed, Regis disagreed saying that the required changes would result in significantly higher costs and delays that would make it unviable to develop. That has the potential to write off nearly 1.89 million ounces of gold reserves that have an in ground value of nearly A$7 billion.
Ms Plibersek’s move at McPhillamys underscores the delicate balance between development and heritage preservation. While protecting cultural sites is commendable, the abruptness of the decision raises eyebrows. Investors now wonder: Will other projects face similar fates? The Australian government’s commitment to consistency remains uncertain.
The Federal Government’s recent actions on McPhillamys follow a continuing trend of politics in Australia, where changes to policy are being pushed often to appeal to a particular group of electors. While Australia has long been considered a low-risk investment destination, recent developments warrant a closer examination.
At a time where gas supplies to the east coast are dwindling, the Greens are pushing to stop the development of new gas projects in the Beetaloo Basin in the Northern Territory. Despite being the future home of Australia’s nuclear submarine fleet, the WA State Government refuses to shift from its ban on new uranium mine developments. Santos finally won a protracted dispute for the development of the Barossa gas project, with opposition to the project funded by a Federal Government agency.
These government actions, proposed or enacted, including changes in regulations, taxation, nationalisation, or arbitrary decisions have the ability to impact project viability.
For those eyeing Australian resources stocks, sovereign risk is no longer an abstract concept. It’s a tangible force shaping investment decisions. Australia’s reputation as a stable mining jurisdiction hangs in the balance. Investors must weigh the allure of abundant mineral wealth against regulatory unpredictability.
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Photo by Built Robotics
